corporate taxes

Let’s see … if I’m a CEO and I can cut my corporate taxes by about 14% by moving overseas, why wouldn’t I?

Feel free to answer that question. And when you do, then perhaps you can figure out one thing that the politicos could have done a loooong time ago to keep corporations here and to spur business expansion and create jobs but haven’t?

Why? Because those nasty corporations didn’t create jobs the last time this was done:

But that’s not how it worked last time. Congress and the Bush administration offered companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage.

This money comes from overseas operations and in some cases accounting maneuvers that shift domestic profits to low-tax countries. The study concluded that the program “did not increase domestic investment, employment or research and development.”

My question is, it didn’t increase “domestic investment, employment or research and development” where? Because unless the stockholders took their money and buried it in a coffee can in the back yard, that’s most likely exactly where it went – via a more circuitous route that the NBER didn’t bother to follow. That money didn’t just disappear when it went to share holders. Where did it go?

Well, first remember that share holders are what? Investors. So even if all they did was let that money ride, it was “invested”.

If, in fact, it was invested elsewhere, then one would assume that those companies in which the investment was made may have increased employment or R &D. But you have to chase the money to find that out.

Bottom line, repatriation of overseas profits means more tax revenues, even at the reduced rate that would be found in a “holiday” as is being proposed. And even if shareholders get the lion’s share of the money (and that’s why they’re called “shareholders” NYT, because they own a share of that money), they’re going to spend it, save it or invest it themselves.

If one could get past the first step in the process and look at how money usually flows and is used, they’d realize that whining about “shareholders” getting most of the money is about as ignorant as complaining that if government gives taxpayers a tax break we wouldn’t spend the money properly, ala Bill Clinton.

Injecting billions of dollars of private money into the private economy in times like this isn’t going to hurt anything. But it stands a great chance of helping. But hey, those damn corporations wouldn’t spend it the way the NYT thinks they should, so they’re against it.

With Japan officially cutting its corporate tax rate as of today, America now has the highest rate among advanced economies. Even its effective tax rate is way above average despite the likes of General Electric spending billions to game the labyrinthine code. A smarter approach would be to substitute a business consumption tax.

Now the United States might cling to second place if Japan cancels the rate reduction to help pay for the tsunami and earthquake devastation. After factoring in state taxes, America’s top rate of 40 percent would still exceed the average of 26 percent for the rest of the OECD.

No, it’s not an April fool’s joke. We do become the nation which taxes corporate entities the most in the world. As Pethokoukis also points out, tax rates are like sticker prices on cars – the real tax is significantly lower than that. But in our case, even with the $40 billion in compliance costs, etc. spent by corporations to lower their tax bill, we still remain the highest corporate tax rate in the world:

Headline rates, of course, are like sticker prices on new cars. The real numbers are lower, thanks in part to the $40 billion companies spend annually to comply with, and often sidestep, the maximum levy. GE, for example, has taken heat for consistently paying less than what the U.S. tax code would imply it should.

But even taking into account the efforts of attorneys and lobbyists, the average effective U.S. rate in 2010 was 29 percent against 21 percent for international counterparts, according to the American Enterprise Institute. And before the recession, corporate tax revenue as a share of U.S. GDP was at its highest since the 1970s.

“Competitive” is a word politicians like to throw around. But their tax rate is non-competitive. It is a factor that weighs heavily on where a business may choose to locate. Or relocate. So while we maintain the highest corporate rate in the world, we see politicians mouthing off about punishing corporations that “outsource” jobs. It is a reaction to a problem government has created and now government talks about punishing those who react rationally to their tax rate? Amazing.

Secondly, as we’ve said ad nauseum – corporations don’t pay taxes, their customers do. The corporation, for the most part, simply acts as a means to pass those taxes (incorporated in the price of the good or service produced by the corporation) on to the Federal government. Any tax rate increase in the corporate world is a tax increase on the customers of that corporation.

What effect would lowering corporate taxes have? Pethokoukis lays out the litany:

Politicians of all stripes have been talking about lowering corporate taxes and eliminating loopholes to pay for a sharp rate reduction. A sharply lower rate — Canada’s will be just 15 percent in January 2012 — would boost worker wages, investment, productivity, jobs and growth. Such reforms, though a big improvement, would still leave in place a flawed and unwieldy structure.

Like the rest of our tax structure, the corporate tax system is in bad need of reform. And yes, it’s just another problem among a galaxy of problems that most likely won’t be adequately addressed. That’s not to say some aren’t trying. Pethokoukis points out an alternative that will, apparently, be introduced by Rep. Paul Ryan in the GOP’s budget plan for next year:

A better alternative might be a consumption tax where business would simply determine its liability by subtracting total purchases from total sales. The tax would then be imposed on what’s left, essentially a firm’s value added. Unlike the corporate income tax, a consumption tax would allow the cost of investments to be fully deducted immediately, providing incentives for more. Such a tax also could be imposed on imports and deducted from exports, as other nations currently do with their VATs.

The Tax Policy Center estimates an 8.5 percent consumption tax — by broadening the tax base and boosting output – would boost corporate tax collections as a percentage of GDP to 4.5 percent from the 2.4 percent the White House forecasts for the next few years. (This is the corporate tax plan, by the way, found in Rep. Paul Ryan’s “Roadmap for America’s Future.”)

If we have to have a tax, this seems eminently more workable and less onerous while not killing competitiveness or having corporations seeking other places to locate. And the obvious bonus is it boosts revenue for the Fed – used hopefully to pay down debt, not enact some pie-in-the-sky new entitlement we can’t afford.

Chancellor George Osborne has announced a number of measures to try to help business in his Budget.

Corporation Tax will be reduced by 2% from April 2011, rather than 1% as previously intended, and fall by 1% in the next three years, to reach 23%.

Mr Osborne also said that he was looking to boost enterprise and exports, as part of a Budget "for making things".

He said he also wanted the UK to be the best place to establish a company.

"Cuts in the burden of corporation tax, that will be worth around £2bn per annum when implemented over the coming years, are likely to be particularly beneficial for big multinational companies," said BBC business editor Robert Peston.

"And a significant lifting of planning constraints will delight much of the corporate sector."

He added: "With the corporation tax changes – and the recent pledge by Vince Cable to slash red tape – they represent a loosening of alleged shackles on the corporate sector."

And business body the CBI said the Budget would help business grow and create jobs.

Wow … what a concept. Cut business taxes and attract businesses, create jobs and actually increase government revenue.